Traders began the week with some cheer as US economic data surprised to the upside and as German leaders backed ECB President Draghi’s commitment to do “whatever it takes to preserve the euro”. As the week progressed traders chose “Risk-On” and we saw some switching out of the defensive sectors which have had a spectacular run, into the growth-sensitive mining and energy sectors.
US stock markets have edged higher every day this week, as investor sentiment has been boosted by improving economic data on the trade and jobs front. The week began with buying across the board, with most sectors now up over 2% for the week. Investors cheered the ISM manufacturing and US Nonfarm payrolls figures. The Labor Department reported US payrolls increased by a seasonally adjusted 163,000 jobs in July (better than the 100,000 forecast), but the unemployment rate rose to 8.3% (up from 8.2%). The Institute for Supply Management reported that service-sector activity expanded at a slightly faster pace in July than the previous month.
The three benchmark indexes are again higher for the week and are now approaching 4-year highs. Traders are still betting on a QE3 as the world’s largest economy requires bigger gains in employment to prevent the ongoing European debt crisis and approaching US “fiscal cliff” from stalling the modest economic expansion. The Federal Reserve said at its FOMC meeting last week that it “expects economic growth to remain moderate over coming quarters”, that it “will closely monitor incoming information on economic and financial developments”, and “will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability”. With the benchmark indexes remaining near 4-year highs, investors are cautiously optimistic of further monetary easing in the coming months.
European stocks climbed for a fifth straight day overnight, as their reporting season rolls on. The European Stoxx 600 index is at its highest close since mid-March, having rallied 16% from its June 2012 lows and moving up for nine consecutive weeks. So far this earnings season 261 companies in the Stoxx 600 have reported half-yearly profit, and 60% have exceed expectations despite the ongoing eurozone debt crisis. There are reports suggesting the debt-laden Spanish government may ask for aid from the European temporary bailout fund, prompting yields on Spanish and Italian bonds to fall by almost half that of the crisis levels. Across the region the banks have been bought up, after investors were assured by Mario Draghi regarding the ECB’s action plan to do “whatever it takes to preserve the euro” and comments from German officials that they would support a plan.
Asian stock markets are closing higher for the week. The Chinese market is attempting to find support after three months of selling, while Hong Kong markets are at 3-month highs and in Japan the market has bounced and is approaching 2-month highs. Asian traders’ focus has moved from the eurozone crisis towards China as some key economic data was released. Markets have traded higher into the end of the week on hopes the Chinese government will add to easing measures, after its CPI report showed Chinese inflation cooled. The Chinese market has bounced, having found support in recent days at a key level, as the National Bureau of Statistics reported Chinese consumer prices (CPI) rose 1.8% from a year earlier (down from a 2.2% gain in June), while industrial production growth cooled in July. Traders are anticipating more affirmative action from the Chinese central banks in terms of additional easing, as growth-sensitive stocks have seen a turnaround in the past couple of weeks. There is also a view that miners and energy companies are lagging gains in the underlying commodities markets and that for this reason they are undervalued on future potential earnings.
In commodities crude-oil prices surged to around $US94 this past week, as concerns grew about supply issues and in anticipation of monetary easing globally. The gold price has bounced in the past few sessions to $US1,620, after news of the ECB’s reassurances and the prospect of QE3 in the US, although this will be delayed into September at this stage. Copper prices have moved to 1-month highs.
The Australian market has continued higher and is now at 3-month highs, due to the prospect of coordinated global central bank action, and our mining and energy stocks continue to show some much needed signs of recovery. 4250 is the current pivotal level and 4200 is the critical support level for next week.
In our market the defensive sectors have seen some severe profit taking, with traders moving towards growth-sensitive mining and energy stocks as our earnings season unfolds. Companies that disappoint are being punished through their share prices, with banks, Telstra, Real Estate REITs and health-care stocks all seeing profit-taking this week, despite the dividend season being this month. The industrials, materials and energy sectors are bouncing off key 3-year lows, and we have seen some active short covering for the near-term. In the past couple of weeks we have forewarned readers that we are seeing some buying in the energy and materials sectors as investors are seeking some ‘Risk-On’, and we have seen follow-through this week.
Investors should have protection in place for their capital, and could look to reduce their risk by using options and warrants strategies. Look to pick up value stocks in growth-sensitive sectors, when they reach your buy levels.
Remain attuned to the news from overseas, particularly from the eurozone, China and the US, and as Aussie stocks begin their reporting season. Monitor the performance of Italian and Spanish borrowing costs, China and the US dollar for a guide to the future direction of commodities and equities prices.
The S&P/ASX 200 index is currently trading at 4291 and is looking to close the week above its 200-day moving average, which will be a key support level for next week. Key levels for the index next week will be 4200 and 4320, with 4250 the key short term pivot level.
Contact me at D2MX Trading on 1300 610 024 and I can help you trade, using a number of strategies that will give you the tools to navigate this market and help you boost your returns on investment.
Investment Adviser D2MX Trading
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This report was prepared by Michael Hevern. It represents the views and opinions of the author. It is not intended for use by any third party, without the approval of Michael Hevern. While this report is based on information from sources which are considered reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect my judgment at this date and are subject to change. Contracting Hevern Pty Ltd is a Corporate Authorised Representative No. 408868 of D2MX Pty Limited ABN 98 113 959 596, AFSL No. 297950 (D2MX), and Michael Hevern has been appointed as an Authorised Representative of Contracting Hevern Pty Ltd. Opinions, conclusions and other information expressed in this report are not given or endorsed by D2MX, unless otherwise indicated. The information contained in this Report is General Advice only, as the information or advice given does not take into account your particular objectives, financial situation or needs.
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